The stock market continues upward yet again. Retail traders, fueled by companies announcing share splits, are taking the market to record territory. Yet for those new traders, there may be big trouble ahead: We’re getting into the most challenging part of the year for investing.
When most traders think of big bear markets, they think of October. That’s due to the Crash of 1929, the Crash of 1987, and the big drop in 2008. All three occurred just days ahead of Halloween.
But the fact of the matter is, while the biggest down days tend to happen late in the fall, October is only the second-worst performing month for stocks on average.
The winner? September . On average, stocks drop 0.5% during that month.
That past performance suggests some caution ahead, especially after the stock market’s recent pop higher. It may even be the best time to short the market.
Between the one-two punch of September’s average drop and October’s propensity for big drops, retail investors might want to think about risk.
There’s one more danger in the calendar before the year is out as well. November’s election poses some likelihood of higher volatility in markets. Usually, that’s a bit to the downside, as the drop in stocks ahead of the 2016 election.
There’s another factor at play that can also wreak havoc with the markets: Valuation. While most traders are ignoring it, we’re at a point that is usually associated with bubbles.
Sure, with interest rates at zero, stocks look attractive. But the high ratio of stocks relative to GDP is well past traditional selloff territory.
The other factor with today’s high-flying markets has been the performance of just a handful of tech names relative to the overall market. The average stock is still down for 2020, but turbo-charged gains by FAANG companies have been more than enough to throw caution to the wind.
When the market’s gains are concentrated in just a few names, the overall market can only be kept up for so long. This trend has been narrowing for some time , but the market selloff and recovery this year amplified it.
All told, the combination of high market valuations and a calendar poised for big selloffs bodes well for potential short-sellers. Chances are we’ll hear from a few hedge fund managers who did just that after the fact.
For day traders, this may be an excellent time to research how put options can be used to protect your portfolio and to take advantage of swift downside moves in stocks. The next few months offer a fantastic window for making a killing betting against the market.